On November 17, 2016, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued four new compliance and disclosure interpretations (“C&DIs”) addressing aspects of offerings under Regulation A and Regulation D.  Highlights of the C&DIs include, among other things, the following guidance:

  • An issuer that seeks to qualify an additional class of securities by a post-qualification amendment to a previously qualified offering statement under Regulation A must satisfy the requirements of Item 4 to Part I of Form 1-A by providing responses that relate only to the additional class of securities.
  • A change of 20% or less in the aggregate offering price, which is permitted under the Note to Rule 253(b) of Regulation A without a post-qualification amendment, may be measured from either the high end (in the case of an increase in the offering price) or the low end (in the case of a decrease in the offering price) of that range.  However, a change of 20% or less is not permitted where the maximum aggregate offering price would result in the offering exceeding the relevant offering limit ($20 million for Tier 1 offerings and $50 million for Tier 2 offerings) or if the change would result in a Tier 1 offering becoming a Tier 2 offering.
  • Consistent with the treatment of EGCs under Section 71003 of the FAST Act, a company filing or confidentially submitting an offering statement under Regulation A may omit financial information for historical periods otherwise required by Part F/S of the Form 1-A, including financial information of other entities required to be included in Part F/S.  However, the company must reasonably believe that the omitted information will not be required to be included in the offering statement at the time of qualification.
  • Offers and sales of securities made in reliance on Rule 506(b) prior to the use of general solicitation in a subsequent Rule 506(c) offering will not be integrated with the offers and sales of securities made in reliance on Rule 506(c).

A copy of the C&DIs is available at: https://media2.mofo.com/documents/161118-question-182-12.pdf

During the ABA Business Law Section Annual Meeting, at the Dialogue with the Director of the Division of Corporation Finance, hosted by the Federal Regulation of Securities Committee, Keith Higgins offered a comprehensive overview of developments.  Mr. Higgins provided a brief update of the proxy season.  He noted that the Staff is pretty far along in its thinking regarding recommendations for disclosures regarding diversity on public boards, consistent with statements made by Chair White (see our prior posts on this link). Mr. Higgins observed that the comment period had closed for the Regulation S-K Concept Release and noted that a significant number of the comments received focused on ESG issues with commenters advocating more disclosures on sustainability and related matters.  Significant comments were received as well on MD&A disclosures, generally favoring the consolidation in a single place of all MD&A related guidance and supporting the continued use of an executive summary.  Also, most commenters expressed concerns about limiting the number of risk factors, as well as concerns about any requirement to have issuers address their responses to risks. Mr. Higgins noted that consistent with the mandates in the FAST Act, the Commission recently requested comment on the 400 series (see our post).  Mr. Higgins also commented on the recent hyperlink release.

On the JOBS Act, Mr. Higgins provided an update through end of August.  There were 92 Regulation CF filings with issuers from diverse sectors, including biotech, brewery, and real estate.  Ten companies have filed Forms CU having raised an aggregate of $4 million.  There have been 128 Regulation A offering statements filed, and 60 qualified, with an almost even split between Tier 1 and Tier 2 offerings.

Mr. Higgins noted that the Staff is finalizing its recommendations to the Commission on the amendments to Rule 147 and Rule 504.  Also, the Staff is working on the disclosure report mandated by the FAST Act to be delivered to Congress by late November.

“Direct-to-consumer” offerings enable companies to raise capital directly from their customers, with or without the use of underwriters or other financial intermediaries. Direct-to-consumer offerings have garnered attention recently given the ability to conduct offerings using a “crowdfunded” approach; however, companies have conducted direct-to-consumer offerings for years. With the amendments to Regulation A (commonly referred to as “Regulation A+”) and the adoption of Regulation Crowdfunding by the Securities and Exchange Commission (the “SEC”), companies have now become more acutely focused on broadening their investor base by soliciting interest in offerings of their securities from their customers. In this alert, we discuss the history of direct-to-consumer offerings, current approaches, the applicable SEC requirements, and considerations for companies undertaking such offerings.

Read our client alert.

On July 19, 2016, the Advisory Committee on Small and Emerging Companies met to discuss the “accredited investor” definition, the Regulation A market, and the Commission’s recent proposal regarding the definition of “small reporting companies.”  In introductory remarks, Chair White shared that the Commission has received 40 comment letters regarding the Commission’s study on the definition of “accredited investor” and hopes to receive further input from the investment community and the Advisory Committee.  The Advisory Committee confirmed its proposed recommendations to the Commission Staff, which include expanding the definition of “accredited investor” to encompass those with professional accreditations (including Series 7, 65, 82 and Chartered Financial Analyst), prior investment experience and, those who pass an accredited investor examination, among other criteria.  Commissioner Stein, in discussing the proposal for modifying the thresholds for SRCs, expressed particular concern about whether the benefits of scaled disclosure will outweigh the potential lower liquidity and high cost of capital that may result from such changes.  By expanding the definition to include companies with up to a $250 million public float, Committee members stressed that companies, including those prospering through successful Regulation A+ offerings, will enjoy a lighter regulatory burden, which should make offerings more attractive.  The SEC has requested comment on this proposal.

Chair White’s remarks are available at https://www.sec.gov/news/statement/opening-remarks-before-the-sec-advisory-committee-on-small-and-e.html

The agenda for the July 19 meeting of the SEC Advisory Committee on Small and Emerging Companies was recently announced.  During the meeting, the Committee will consider the “Accredited Investor” definition recommendation as discussed during the May 18 meeting.  There will also be an update and review of the first year of Regulation A+. The meeting will conclude with the SEC’s proposal to amend the “Smaller Reporting Company” definition.

The meeting will be live-streamed via the SEC website: https://www.sec.gov/info/smallbus/acsec.shtml

PLI’s Private Placements and Hybrid Securities Offerings 2016 conference on August 1-2, 2016, presents an expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. In addition, they will address the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. The panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital raising alternatives.

Morrison & Foerster Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on Day One of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on Day Two. Morrison & Foerster Partner James Tanenbaum will speak on a panel entitled “Regulation A+” on Day One. The conference will be held at the PLI New York Center in New York, NY and is scheduled to begin at 9:00 a.m. EDT.

To register for this conference, or for more information, please click here.

On July 21-22, 2016, Practising Law Institute will host its “Understanding the Securities Laws 2016” seminar. This program will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners as well as SEC staff. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the securities related provisions of the FAST Act and related SEC regulations, and on how securities lawyers can solve practical problems that arise in the context of public and private offerings, SEC reporting, mergers and acquisitions and other common corporate transactions.

Morrison & Foerster Partner Anna T. Pinedo will lead a session entitled “Securities Act Exemptions” on Day One of the program. Topics will include:

  • Exempt securities versus exempt transactions;
  • Private placements;
  • Regulation D offerings;
  • Regulation A+ offerings;
  • Intrastate offerings;
  • Crowdfunding;
  • Employee equity awards;
  • Rule 144A high yield and other offerings;
  • Regulation S offerings to “non-U.S. persons”; and
  • Resales of restricted and controlled securities: Rule 144, Section 4(a)(7) and 4(a)(1½).

PLI will provide CLE credit.

For more information, or to register, please click here.

On June 14, 2016, the D.C. Circuit Court of Appeals in Lindeen v. SEC upheld Regulation A+, including the SEC’s definition of “qualified purchaser.”  The decision comes after petitioners William F. Gavin and Monica J. Lindeen, the chief securities regulators for Massachusetts and Montana, respectively, petitioned the court to vacate the SEC’s promulgation of Regulation A+, arguing that it failed the statutory construction test established by the U.S. Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.  Regulation A+ defines “qualified purchaser” as any person to whom securities are offered or sold pursuant to a Tier 2 offering, thus preempting all state registration and qualifications for Tier 2 securities.  However, Tier 2 offerings are still subject to an investment limit of no more than 10% of the greater of the investor’s annual income and net worth (for non-accredited, non-natural persons, the 10% limit is based on annual revenues and net assets), although the 10% investment limitation is not applicable to accredited investors or to offerings of listed securities.

The petitioners argued that (1) the commonly understood definition of “qualified,” which modifies “purchaser,” means that the SEC must in some way reduce the universe of “purchasers” from “any purchaser;” (2) the SEC’s definition is not consistent with the public interest and the protection of investors; (3) Regulation A+ renders the word “qualified” superfluous and otherwise conflicts with the structure of the Securities Act of 1933; (4) federal securities law has always linked the term “qualified” with a purchaser’s wealth or sophistication; and (5) the legislative history of the National Securities Markets Improvement Act (NSMIA) demonstrates that Congress wanted the SEC to limit a “qualified purchaser” to one with a certain level of wealth or sophistication.  The court denied the petition on the grounds that Congress explicitly authorized the SEC to define qualified purchaser and to adopt different definitions for different types of securities.  The court noted that the SEC acted within its grant of authority in determining that any Tier 2 securities purchaser would be qualified so long as it complied with the 10% investment limitation.  The court held that the SEC appropriately balanced the goals of mitigating regulatory burdens for certain small offerings and adequately protecting investors in the securities markets.  The court also noted that Tier 2 offerings provided sufficient protection, even in the absence of substantive state law review.  Furthermore, both the federal and state antifraud statutes still apply to such offerings and the 10% investment limitation weighed in favor of reducing the need for additional state securities law review.

The court’s decision is available at:  https://www.cadc.uscourts.gov/internet/opinions.nsf/2A89FF33F1B350E185257FD200505A56/$file/15-1149-1619182.pdf

While the JOBS Act helped spur larger, venture capital- and private equity-backed companies to consider IPOs, it has not served to revive the smaller IPO market. Perhaps the IPO market downturn will cause market participants to consider the merits of a Regulation A+ offering with an exchange listing.  To read this CFO magazine guest article by partner Anna Pinedo, click here: http://ww2.cfo.com/capital-markets/2016/04/will-reg-a-offerings-flourish-in-the-ipo-downturn/.

For offerings that require state securities registration and review, clients often are concerned about the merit regulation standards. Certain of NASAA’s Statements of Policy, for example, may pose significant issues. From time to time, commentators have requested that a review be undertaken of the following six policies: the Statement of Policy Regarding Promoter’s Equity Investment, the Promotional Shares Statement of Policy (a/k/a the “cheap stock” rule), the Statement of Policy Regarding Options and Warrants, the Statement of Policy Regarding Unequal Voting Rights, the Statement of Policy Regarding Specificity in Use of Proceeds, and the Statement of Policy Regarding Loans and Other Material Transactions.

Recently, in connection with the NASAA Coordinated Review approach for Regulation A offerings, the Corporation Finance Section has published a request for comment on four of these statements of policy. The comment period closes quickly on May 1, 2016.

The proposed revisions to the statements of policy may be found here: http://business.cch.com/srd/SOP-Revisions-Request-for-Public-Coments.pdf.